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The USDA will issue its July Supply/Demand report on Friday, just after this writing and the report is likely to show a tight ending stocks forecast for the end of the 2009/10 season which would lead to smaller beginning stocks for the upcoming crop season. In the process of pricing in both a near-perfect start to the crop season and improving crop conditions in May and June, December 2010 corn pushed to a life-of-contract low ahead of the key USDA reports on June 30th.
The USDA Planted Acreage and June 1st Grain Stocks reports were considered very bullish, and prices have already jumped as much as 13.5% in just 4 trading sessions. This suggests that a major low could be in place. The corn market seems to be in a position to move higher over the near-term, and it seems to have some of the key characteristics to attract interest from large money managers and fund traders as a “buy and hold” commodity.
Planted acreage was revised lower to 87.87 million acres, as compared with 88.8 million acres on the March report and expectations of a 400,000 to 600,000 acre increase from that March forecast. This was below the low end of the range of trade expectations. June 1st stocks came in at 4.31 billion bushels, which was roughly 290 million bushels below trade expectations. The stocks number implies much better than expected demand for corn during the past quarter, and this suggests another significant revision lower for 2009/10 ending stocks. In the long run, the 2009 crop was probably overestimated. However, there is still talk that the lower quality of the 2009 crop meant that it took more corn to produce the same amount of ethanol and to feed animals to the same weight. With lower beginning stocks and lower plantings for the 2010/11 season, the ending stocks forecast is likely to tighten.
However, yield is also likely to be revised higher. Even if we revise yield to a record 168 bu/acre, when we plug both the lower beginning stocks and lower acreage numbers, ending stocks come in at just 1.526 billion bushels. If yield is a lesser record at 166 bu/acre, ending stocks slip to 1.365 billion bushels with a tight 10.2% stocks/usage. If we see late season heat and some dryness from mid-July through mid-August, some of the later planted corn crop could see unfavorable conditions for pollination and this could clip yield enough to cause a significant tightness in the corn supply outlook. The development of above normal heat recently, with more heat expected in the long term forecast, may trim yield forecasts as this is occurring as the corn crop starts to pollinate in key growing areas.
Nighttime lows will also be watched closely. If they remain above 80 degrees, this can seriously hamper the pollination process. Traders noted that plant populations have increased in corn fields in recent years and that this increased concentration of vegetation raises the temperature in corn field above that of the surrounding air. This could cause added stress and lessen the ability of the crop to cool down at night which is necessary for an optimal pollination. For example, if actual average yield comes in at 161 bushels/acre, still the second highest on record, ending stocks slip under 1 billion bushels and stocks/usage drops to just 7.2%. Stocks/usage has been under 10% only two other times since 1973 and this would suggest a December corn price of near 5.25 to 5.65 into late August.
Crop conditions have deteriorated in the past two weeks due to too much rain, especially in Iowa. The good-to-excellent corn rating dropped to 71% as of July 4th versus 73% the previous week and 75% two weeks earlier. However, Iowa conditions fell to 65% from 72% last week and this is a growing concern for the market. However, pollination weather looks near ideal for the corn crop until or unless extreme heat moves back over the Midwest for the July 17th to 24th timeframe. Many weather models are showing this feature and this could clip the yields for some of the late planted crop. Silking stands at 19% as of July 4th, well ahead of last year’s 8% at this point. This is also ahead of the 5-year average of 12%. Silking is the best indicator of the start of pollination although the corn plant starts to shed pollen slightly before silking and it continues to shed pollen for several days thereafter. Weather conditions are critical during this period since the plant will not shed its pollen if conditions are wet or too hot. The reason that pollination is critical is that each silk that is pollinated produces a kernel on the ear of corn. If there is uneven pollination, there will be fewer kernels which means fewer bushels per acre regardless of how favorable late season weather may be.
The Commitments-of-Traders report for the week ending June 29th showed heavy net selling by funds. Trend-following (managed) funds were net sellers of a whopping 50,221 contracts to switch their net position back to the short side at 39,426 contracts. The reporting period ended on the day that the December contract posted its recent low at 343 1/4, just ahead of lthe USDA’s Acreage and Quarterly Stocks reports. Therefore, trend-following funds may have gotten themselves trapped on the short side ahead of the USDA’s reports, and that could provide a foundation for significant fund buying ahead if weather is even mildly stressful and prices continue to advance. For example, if trend-following funds simply return to the 4-year mid point of their position in corn, this would be a switch from the current net short position of near 40,000 contracts to a net long of 120,000 to 160,000 contracts.
Other factors which could support the corn market in coming weeks are the China production outlook and the recent collapse in the US dollar. If the dollar sees increased pressure ahead, commodity markets in general could be well supported. Major corn growing areas in North East China have received substantial rain over the past weekend but conditions are still looking variable depending on location. Parts of the north China Plains are still showing excessive heat. If China’s crop comes in smaller than expected, imports could be significant. The rains were very welcome as dry conditions and above normal temperatures in that region in recent weeks had raised fears of a drought. Some areas are still seeing temperatures of 95 to 105 degrees in the China plains which may impact yield.
Keep in mind, a near record yield of 164 bushels per acre will leave the stocks/usage at only 9%, the second tightest since 1973 and a level which might spark aggressive pricing from end users.
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